1986 (7) TMI 8 - SC - Income Tax

Supreme Court: Compensation for surrendering forest leases not taxable as revenue, deemed capital receipts

Commissioner of Income-Tax, Bombay City Versus Bombay Burmah Trading Corporation

The Supreme Court held that the amounts received by the assessee were capital receipts, not liable to tax as revenue receipts. The court affirmed that the ... Forest Lease - On nationalisation of forests, depreciable assets were handed over to Government, and compensation was received in form of logs - those logs sold on profit - Whether balancing charge is attracted on the depreciable assets? For levy of balancing charge under s. 10(2)(vii) - As no money has been paid, s. 10(2)(vii) is not attracted. Issues Involved:1. Whether the receipt of certain amounts was of a capital or revenue nature.2. Applicability of section 10(2)(vii) of the Indian Income-tax Act, 1922.3. Taxability of excess realizations over Rs. 225 per ton for logs received in respect of depreciable assets, stores, and livestock.Issue-Wise Detailed Analysis:1. Whether the receipt of certain amounts was of a capital or revenue nature:The primary issue was to determine whether the amounts received by the assessee were capital receipts or revenue receipts. The assessee, a public limited company, had forest leases in Burma for felling teak trees. Due to the nationalization of forest operations by the Government of Burma, the assessee surrendered its residuary rights under the forest leases and certain assets. In return, the Government of Burma handed over 43,860 tons of teak logs to the assessee. The Income-tax Officer and the Appellate Assistant Commissioner treated these receipts as revenue in nature, while the assessee contended they were capital receipts.The Supreme Court held that the forest leases were capital assets as they constituted the profit-making apparatus of the assessee. The compensation for the surrender of these rights and assets was for sterilization of the business, thus a capital receipt. The court referred to several precedents, including Van den Berghs Ltd. v. Clark and Hood Barrs v. IRC (No. 2), to establish that payments for cancellation or sterilization of rights under such leases are capital receipts.2. Applicability of section 10(2)(vii) of the Indian Income-tax Act, 1922:The second issue was whether the amounts of Rs. 1,41,156 for the assessment year 1950-51 and Rs. 44,407, Rs. 8,639, and Rs. 2,16,929 for the assessment year 1951-52 were liable to tax under section 10(2)(vii) of the Act. This section pertains to balancing charges on the sale of depreciable assets.The Supreme Court observed that the agreement dated June 10, 1949, between the assessee and the Government of Burma did not involve any sale transaction but was a result of nationalization. The assets were handed over in exchange for logs, not sold for money. Therefore, the amounts in question could not be taxed under section 10(2)(vii). The court referred to CIT v. Motors & General Stores (P.) Ltd. to support this conclusion.3. Taxability of excess realizations over Rs. 225 per ton for logs received in respect of depreciable assets, stores, and livestock:The third issue was whether the excess realizations over Rs. 225 per ton for logs received in respect of depreciable assets, stores, and livestock were liable to tax. The High Court had held these amounts as capital receipts.The Supreme Court agreed with the High Court, stating that the logs were received in lieu of the assets handed over to the Government and were not received on revenue account. The logs were maintained in a separate account and not mixed with the stock-in-trade, indicating they were not received as stock-in-trade. Therefore, the sale proceeds of these logs were capital receipts.Conclusion:The Supreme Court upheld the High Court's decision, concluding that the amounts received by the assessee were capital receipts, not liable to tax as revenue receipts. The court dismissed the appeals with costs, affirming that the compensation for the surrender of residuary rights and assets under the forest leases was for the sterilization of the business and thus constituted capital receipts.